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28 May 2021

Econ Digest

Build a savings portfolio to beat inflation


          Thailand’s inflation data began to rise in April 2021, causing many parties to pay more attention to this issue as it comes at a time when the economy has not recovered yet. The headline inflation (CPI) rose to 3.41% in April this year, in line with inflation trends of many countries, although the acceleration of inflation rate over the past few months has been driven by supply-side factors, especially the difference in oil prices this year compared to the previous year.

         It cannot be denied that savings deposited in banks may essentially not grow as fast as other investments, as the current average interest rate for demand deposits in banks is at 0.25% per year and 0.3-0.5% per year for time deposits, making the effective rate of return negative after inflation. In other words, the value of saving deposits is lower throughout the year compared to price increases in goods and services. As long as the policy interest rate stays at a low level, which is expected to be the case for at least the next 1-2 years, commercial banks’ deposit rates will see little change.

        “Don’t put all your eggs in one basket” is an English idiom that reminds us of the importance of risk diversification, and which may better reflect the investment concepts of this era than the Thai idiom “A penny saved is a penny earned” that focuses only on savings. Because it can be tiring to rely on savings alone, especially in a prolonged period of low interest rates, if your savings or income is greater than your expenses, you should start allocating savings that are not necessary for expenses in the next 2-3 years as investments to increase savings opportunities for stable and long-term wealth accumulation.

        Build your savings portfolio to invest in order to beat inflation. The purpose of increasing the rate of return on savings is different from the act of investing in risky assets for the opportunity to increase returns (Search for Yield), with the main difference being in the approach. Here we recommend 3 important ‘do not’ principles, namely:

  • Do not forget to consider the level of risk you are willing to take
  • Do not put your entire life savings into one investment
  • Do not neglect to diversify investment among multiple asset classes with different levels of risk.

        This will increase the chances that there are still eggs in the basket that will feed you, even in critical situations.

       The nature of investment is that high return opportunities are often traded with high risks. For example, stocks are considered high risk, but have a good chance of yielding strong returns.  However, there is an alternative choice which is namely the option to invest through equity funds that can be selected according to personal beliefs and preferences, including Thai stocks, foreign stocks, dividend stocks, business-specific stocks such as real estate stocks, gold funds, and oil funds. In general, unless it is a situation that affects all markets worldwide, choosing different types of investments can reduce risks and yield better returns than savings deposits and/or even through government bonds and corporate bonds, whose yields decrease sequentially according to the interest rate direction. However, if you want to get a higher return, you can extend the investment period, but just make sure that such funds are cold money that is not urgently needed while waiting for the investment to mature.

      In times of rising inflation, if savers/investors set a condition that their investment returns or interest cannot be negative after inflation and must be low-risk, then the only options available are some term deposits and government bonds. In addition to these two options, savers/investors have to take more risks. Looking on the bright side, with Thailand’s inflation tending to resume to a positive rise, this might be a good time to apply knowledge of investment options to help build your savings portfolio to beat inflation!    

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Econ Digest